The Effects of Perceived and Actual Financial Literacy on Financial Behaviors

Abstract

A combined measure of financial literacy that includes both a test score of actual financial literacy and a self-rating of overall financial literacy is used in this study. We find that the combined measure provides greater understanding about how financial literacy affects financial behaviors. A large national survey of U.S. adults and households (n=28,146) was used to investigate how this overall financial literacy affects financial behaviors across five financial topics: credit cards, investments, loans, insurance, and financial advice. For each topic we include four to five financial behaviors (22 in total) to demonstrate the consistency of the findings within and across topics. The results from the probit analysis show that both actual and perceived financial literacy significantly influence financial behaviors and that perceived financial literacy can be as or more important than actual financial literacy.

Keywords: financial literacy, financial behavior, credit cards, investments, insurance, financial advice

JEL Classification: D14, G00